After careful due diligence, and leveraging my contacts in the space, I have unearthed a technology stock that could prove to be a big winner.

Pixelworks (NASDAQ –PXLW - $2.85) is a fabless semiconductor company that designs, develops and markets innovative video and pixel processing chips and software for high-end display applications, including digital projection and large screen LCD flat panels. The projector market provides Pixelworks with the largest part of its revenues and PXLW ships projector solutions to all 10 of the largest projector brands, covering the high end to the low end of the entire market.

Overall, its solutions leverage proprietary core technologies that enable digital display and projection device manufacturers to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. The increasing popularity of large, high-resolution flat panel displays for applications such as digital TVs and digital signage is also driving the need for high performance processor solutions to meet the video quality requirements of next generation display products.

The flat panel display market has gone through some slow periods recently, as there has been a glut of product in the market, particularly in televisions, with prices dropping sharply. However, in recent due diligence meetings we have had with major players in the market, this segment is poised to have a strong finish to the year and a very solid 2013. Perhaps this is just beginning to become realized and reflected in the stock price due to recent news that flat panel display and television prices have actually increased of late, reversing a year-long trend.

With respect to PXLW, this dovetails with the Firm’s approach in this arena where it has secured and ramped design wins with several Top 5 TV OEM's and ramped volume shipments of the next generation family of products for the projection and TV/Panel markets. Clearly, new product initiatives will drive revenue growth.

The numbers on PXLW this year are not spectacular but are tracking well and 2013 looks like a great year. Street estimates call for $64M in revenue with minimal profitability in 2012 but sequentially increasing margin improvement. Meanwhile for 2013, revenue is expected to jump to $80 million in 2013, with EPS of $0.26. Thus, at current levels, the stock is trading around 11x next year’s EPS, which is still a low valuation, in our view. We think it could trade up to the $4.00 level in the coming months based on current trends which would still only give it a 15x multiple on projected 2013 EPS.

Of course it doesn’t hurt that the stock has hit a new 52-week high and PXLW has roughly $1.00 per share in cash, which means investors are only paying roughly $2.00 per share for the stock. By the way, the fact that, a Senior VP of Sales made 5 separate purchases of stock totaling 100,000 shares at an average of around $2.45 in late 2Q12 doesn’t hurt either.

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